WP/04/47

When Is Growth Pro-Poor?

Cross-Country Evidence
Aart Kraay
 2004 International Monetary Fund WP/04/47

IMF Working Paper

Research Department

When Is Growth Pro-Poor? Cross-Country Evidence

Prepared by Aart Kraay1

Authorized for distribution by Ashoka Mody

March 2004

Abstract

This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent
those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are
published to elicit comments and to further debate.

Growth is pro-poor if the poverty measure of interest falls. This implies three potential sources
of pro-poor growth: (a) a high rate of growth of average incomes; (b) a high sensitivity of
poverty to growth in average incomes; and (c) a poverty-reducing pattern of growth in relative
incomes. I empirically decompose changes in poverty in a large sample of developing countries
into these components. In the medium run, most of the variation in changes in poverty is due to
growth, suggesting that policies and institutions that promote broad-based growth should be
central to pro-poor growth. Most of the remainder is due to poverty-reducing patterns of growth
in relative incomes, rather than differences in the sensitivity of poverty to growth in average
incomes. Cross-country evidence provides little guidance on policies and institutions that
promote these other sources of pro-poor growth.

JEL Classification Numbers: I32, O40

Keywords: poverty, growth

Authors E-Mail Address: akraay@worldbank.org

1
The World Bank, Washington, DC., and was on secondment to the IMFs Research
Department while parts of this paper were written. This paper was prepared in the context of the
pro-poor growth program sponsored by the World Banks Poverty Research and Economic
Management (PREM) group. The author is grateful to Roberta Gatti, Francisco Ferreira, and
Martin Ravallion for helpful discussions, and to Shaohua Chen for providing data.
 -2-

Contents Page

I. Introduction.................................................................................................................. 3

II. Empirical Framework .................................................................................................. 5

III. Data ............................................................................................................................ 10

IV. Results........................................................................................................................ 11

V. Relative Importance of Sources of Pro-Poor Growth ................................................ 12

VI. What Drives the Sources of Pro-Poor Growth?......................................................... 16

VII. Conclusions................................................................................................................ 21

References.............................................................................................................................. 33

Tables
1. Correlations of Poverty Measures and Survey Mean Income or Consumption......... 22
2. Decomposing Changes in Poverty: All Spells ........................................................... 23
3. Decomposing Changes in Poverty: Long Spells........................................................ 24
4. Correlates of Pro-Poor Growth: All Spells ................................................................ 25
5. Correlates of Pro-Poor Growth: Long Spells............................................................. 26
6. Multivariate Growth and Distributional Change Regressions ................................... 27

Figures
1. Relative Growth Incidence Curves ............................................................................ 28
2. Sensitivity of Poverty to Growth in Percentile p ....................................................... 29
3. Growth and Poverty Reduction: Long Spells ............................................................ 30
4. Decomposing Changes in the Headcount .................................................................. 31
5. Policies and Growth and Distribution Components of Changes in Policy ................ 32
 -3-

I. INTRODUCTION

In the past few years, the term pro-poor growth has become pervasive in discussions of
development policy. Despite the widespread use of the term, there appears to be much less
consensus as to what exactly pro-poor growth means, let alone what its determinants are.
According to one view, growth is pro-poor if the accompanying change in income
distribution by itself reduces poverty (Kakwani and Pernia (2000)). However, this definition
is rather restrictive, since it implies that, for example, Chinas very rapid growth and
dramatic poverty reduction during the 1980s and 1990s was not pro-poor because the poor
gained relatively less than the nonpoor. A broader and more intuitive definition is that growth
is pro-poor if the poverty measure of interest falls. Ravallion and Chen (2003) propose this
definition and apply it to a particular poverty measure, the Watts index.

In this paper, I adopt the broader definition and then apply standard poverty-decomposition
techniques to identify three potential sources of pro-poor growth: (a) a high rate of growth of
average incomes; (b) a high sensitivity of poverty to growth in average incomes; and (c) a
poverty-reducing pattern of growth in relative incomes. I implement this decomposition for
several poverty measures, using household-survey data for a large sample of countries in the
1980s and the 1990s. I then use variance decompositions to summarize the relative
importance of these different sources of pro-poor growth. Finally, I investigate the correlates
of the sources of pro-poor growth in a large panel of observations on changes in poverty.

The main results of this paper are the following. First, regarding the relative importance of
the three potential sources of pro-poor growth, I find that roughly half of the variation in
short-run changes in poverty can be explained by growth in average incomes. In the medium-
to-long run, between 66 and 90 percent of the variation in changes in poverty can be
accounted for by growth in average incomes. Virtually all of the remainder is due to changes
in relative incomes. In contrast, cross-country differences in the sensitivity of poverty to
growth in average incomes account for very little of the variation in changes in poverty.

Second, I find some evidence that growth in average household-survey incomes is correlated
with several of the usual determinants of growth from the empirical growth literature,
including institutional quality, openness to international trade, and size of government.
Although the evidence documented here for the correlates of growth in household-survey
incomes is not especially compelling, I argue that this likely reflects the limited country
coverage and presence of measurement error in the household-survey data on which this
paper is based.

Third, I find relatively little evidence that poverty-reducing patterns of growth in relative
incomes are significantly correlated with a set of explanatory variables that the empirical
growth literature has identified as significant determinants of growth in per capita GDP. The
same is true for a number of other variables that, while not generally significant for growth,
have been suggested in the literature as potentially reducing inequality.
 -4-

Taken together, these results underscore the importance of growth in average incomes for
poverty reduction. This, in turn, suggests that a policy package focusing on known
determinants of growth in average incomes, such as the protection of property rights, stable
macroeconomic policies, and openness to international trade should be at the heart of pro-
poor growth strategies. Moreover, the absence of compelling evidence that these factors are
systematically correlated with the changes in income distribution that matter most for poverty
reduction suggests that there are no obvious trade-offspolicies that lead to growth in
average incomes are unlikely to systematically result in adverse effects on poverty through
their effects on relative incomes.

This does not mean that growth in average incomes is sufficient for poverty reduction.
Rather, the results presented here suggest that cross-country evidence is unlikely to be very
informative about the policies and institutions that are likely to lead to poverty-reducing
patterns of growth in relative incomes. This suggests that more micro-level and case-study
research may be useful in shedding light on the determinants of poverty-reducing
distributional change.

This paper is related to a growing empirical literature on growth, inequality, and poverty.
Most immediately, this paper builds on Dollar and Kraay (2002). In that paper, the authors
defined the poor as those in the bottom quintile of the income distribution and empirically
investigated the determinants of growth in incomes of the poorest quintile. In a large panel of
countries, we found that growth in incomes of the poor tracked growth in average incomes
roughly one for one. Since the growth rate of average incomes of the poor is just the sum of
the growth rate of average incomes and the growth rate of the first-quintile share, our paper
showed that neither average incomes nor a large set of other control variables were
significantly correlated with changes in the first-quintile share. That paper contributed to a
growing literature on the determinants of inequality, including Li, Squire, and Zhou (1998);
Gallup, Radelet, and Warner (1998); Spilimbergo, Londono, and Szekely (1999); Leamer
and others (1999); Easterly (1999); Barro (2000); Foster and Szekely (2001); and Lundberg
and Squire (2003).

This paper differs from Dollar and Kraay (2002), as well as much of the existing literature on
determinants of inequality, in two key respects. First, instead of looking at relative poverty
measures or inequality, I focus primarily on changes in absolute poverty measures as the
dependent variable.2 As is well understood, changes in absolute poverty measures are
complicated and nonlinear functions of underlying changes in average income and income
distributions.3 The second contribution of this paper is to empirically construct the exact

2
A notable early exception is Ravallion and Chen (1997), who estimate regressions of
changes in absolute poverty on changes in mean incomes using a panel of household surveys
from developing countries.
3
See, for example, Bourguignon (1999) for a lognormal example.
 -5-

measures of distributional change that matter for changes in poverty for a large sample of
countries, rather than simply looking at common summary statistics of inequality such as the
Gini coefficient or quintile shares. This means that I can empirically study the contributions
of growth and distributional change to changes in poverty without having to make restrictive
assumptions about the shape of the underlying income distribution.4

Despite these differences, the main conclusions of this paper are similar to those in Dollar
and Kraay (2002). In particular, both papers find that growth in average incomes matters a
great deal for reductions in both relative and absolute poverty. Both papers also find little
evidence that common determinants of growth, as well as a number of other variables, are
robustly correlated with patterns of distributional change that matter for poverty reduction.

The rest of this paper proceeds as follows. Section II reviews standard poverty-
decomposition techniques and uses them to illustrate the channels through which growth and
distributional change matter for changes in a number of poverty measures. Section III
describes the dataset of changes in poverty in a large sample of developing countries on
which the empirical analysis is based. Section IV presents the results. Sections V and VI
provide evidence on the relative importance of the sources of pro-poor growth, as well as
evidence on some of the correlates of these sources. Section VII concludes.

II. EMPIRICAL FRAMEWORK

In this section I use standard techniques to decompose the change in poverty into three
components: (a) growth in average incomes; (b) the sensitivity of poverty to changes in
average incomes; and (c) changes in relative incomes. Let yt(p) denote the income of the pth
percentile of the income distribution at time t. This can be written as a function of average
dL ( p)
income, t, and the Lorenz curve, Lt(p), i.e. y t ( p) = t t . Let Pt denote the following
dp
generic additive poverty measure:

1
Pt = f ( y t ( p)) dp (1)
0

4
For example, Lopez (2003) investigates the determinants of growth and change in the Gini
coefficient, and then draws conclusions regarding the likely effects on poverty by assuming
that the distribution of income is lognormal, so that there is a one-to-one mapping between
the Gini coefficient and the Lorenz curve.
 -6-

This notation captures a number of different poverty measures. For example, if

z y t ( p)
f ( y t ( p) , ) = up to the headcount, H t = y t1 ( z ) where z is the poverty line, and
z
zero afterwards, we have the Foster-Greer-Thorbecke class which includes the headcount
z
(=0), the poverty gap (=1), and the squared poverty gap (=2). If f ( y t ( p) ) = ln
y
t ( p )
up to the poverty line and zero afterwards, we have the Watts poverty index. Another
possibility is a broader social welfare function without a discontinuity at the poverty line,
such as Atkinsons (1970) equally distributed equivalent income (EDEI). In this case
1

f ( y t ( p) ) = y t ( p ) for all p, and Pt is the poverty measure of interest.

Next, we can differentiate this poverty measure with respect to time to get:5
dPt 1
dt 0
= t ( p) g t ( p) dp (2)

Equation (2) tells us that the rate of change in the poverty measure is the average across all
percentiles of the income distribution of the growth rate of each percentile multiplied by the
sensitivity of the poverty measure to growth in that percentile. In particular,
df ( y t ( p))
t ( p) y t ( p) is the semi-elasticity of the poverty measure with respect to the
dy t ( p)
income of the pth percentile. This term captures the effect on poverty of a small change in
incomes of individuals at the pth percentile of the income distribution. This sensitivity is
dy ( p) 1
multiplied by g t ( p ) t , which captures the growth rate of incomes at each
dt y t ( p)
percentile of the income distribution. Ravallion and Chen (2003) refer to this function as the
growth incidence curve. The overall change in poverty then consists of the average across
all percentiles of the product of these two terms.

In order to separate out the effects of growth in average incomes, we can re-write equation
(2) by adding and subtracting average growth to get:

5
Differentiating under the integral sign in equation (1) requires the application of Leibnitzs
rule. Note that the term involving the derivative of the upper limit of integration is zero, since
the poverty measures are zero when evaluated at the incomes of those at the poverty line. For
EDEI both the upper and lower limits of integration are constant and so the derivative simply
passes through the integral sign.
 -7-

dPt d t 1 1 1
d t 1
dt dt t 0 t ( p) g t ( p)
= t ( p ) dp + dp (3)
0 dt t
Equation (3) identifies the three sources of pro-poor growth that we have been discussing:
(a) growth in average incomes; (b) the sensitivity of poverty to growth in average incomes;
and (c) growth in relative incomes. The first term in equation (3) captures the first two
d 1
sources of pro-poor growth. It consists of growth in average incomes, t , multiplied
dt t
by a term summarizing the sensitivity of the poverty measure to changes in average incomes,
1

( p) dp . This sensitivity is simply the average across all percentiles of the sensitivity of
0
t

poverty to growth in each percentile of the income distribution. The second term in Equation
(3) captures the remaining source of pro-poor growth: changes in relative incomes. In
particular, this third source of pro-poor growth is the average across all percentiles of the
income distribution of the product of (a) the growth rate of income in the pth percentile
relative to average income growth, and (b) the sensitivity of poverty to growth in that
percentile. For example, if the poverty measure of interest is very sensitive to growth among
the poorest, and if the income of the poorest grows faster than average incomes, then poverty
will fall.

Equation (3) is useful for thinking about the various definitions and sources of pro-poor
growth. For example, the Kakwani and Pernia (2000) definition of pro-poor growth states
that growth is pro-poor if and only if the second term in equation (3) is negative, i.e., the
pattern of growth in relative incomes is such that the poverty measure falls. A broader
definition of pro-poor growth suggested by Ravallion and Chen (2003) is that growth is pro-
poor if the poverty measure of interest falls. According to this definition, there are three
potential sources of pro-poor growth: (a) rapid growth in average incomes; (b) a high
sensitivity of poverty to growth in average incomes; and (c) a poverty-reducing pattern of
growth in relative incomes.

In the empirical section of this paper, I will use data on income distributions and average
incomes for a large sample of developing countries to construct these three sources of pro-
poor growth, document their relative importance, and investigate their determinants. Before
doing so, however, it is useful to examine the key ingredients in equation (3) in more detail:
d 1
the pattern of growth in relative incomes, g t ( p) t , and the function summarizing
dt t
the sensitivity of poverty to growth in each percentile, t(p).

Figure 1 graphs two examples of the pattern of growth in relative incomes, for China over the
period 1990-1998, and for Indonesia over the period 1996-1999. In China, according to the
household survey average incomes grew at 14 percent per year, and the dollar-a-day
headcount measure of poverty fell from 51 percent to 33 percent of the population.
 -8-

However, there was also a sharp increase in inequality during this period, with the Gini
coefficient rising from 34 to 40. The pattern of relative income growth rates shown in the
relative growth incidence curve highlights this pattern of increased inequality. Growth in the
poorest 80 percentiles of the population was below average growth, while the richest
20 percent of the population saw above-average growth. In Indonesia, survey mean income
fell dramatically between 1996 and 1999 at nearly 9 percent per year as a result of the East
Asian financial crisis. Yet during this period, the pattern of growth in relative incomes was
poverty-reducing. Inequality as measured by the Gini coefficient fell from 36.5 to 31.5. The
relative growth incidence curve is downward sloping, indicating that incomes of the richer
percentiles of the income distribution fell faster than incomes of poorer percentiles. In fact,
below-average growth was recorded only for the richest 20 percent of the population.
Despite this pro-poor pattern of relative income growth, the headcount measure of poverty
increased from 8 percent to 13 percent of the population, driven by the large negative growth
effect.

Consider next the sensitivity of the poverty measure to growth in different percentiles of the
income distribution. In the case of the Foster-Greer-Thorbecke class,
t ( p) = ( y t ( p) / z ) (1 y t ( p) / z ) 1 up to the headcount, and zero afterwards. For the
Watts index, t ( p) = 1 up to the headcount, and zero afterwards. Finally, for EDEI, we
have t ( p ) = y t ( p ) . Note that these sensitivities depend not only on the poverty
measure of interest, but also on the entire distribution of income as summarized by yt(p).
Figure 2 graphs these sensitivities, using the actual distribution of income in China in 1990 as
an example, to show how different poverty measures are sensitive to growth in different
percentiles of the income distribution.

In the case of the headcount, this sensitivity is zero everywhere except just below the poverty
line where it spikes down to minus infinity. This is because the headcount simply adds up the
number of people below the poverty linesmall increases in income of inframarginal poor
people that do not bring them above the poverty line will not reduce the headcount. The same
is true for increases in incomes of those above the poverty line, including the near-poor just
above the poverty line. The case of the headcount already illustrates the broader point of
Figure 2: whether a given pattern of growth is pro-poor or not depends crucially on the
poverty measure of interest. In particular, if pro-poor growth in the sense of reducing the
headcount measure of poverty is the objective, then a pro-poor growth strategy should focus
exclusively on raising the incomes of those just at the poverty line, and should ignore
everyone else.

This strong and slightly absurd conclusion is in part driven by the choice of the headcount as
the poverty measure of interest. Consider next the poverty gap and the squared poverty gap.
The poverty gap is most sensitive to growth in incomes of those at the poverty line, but is
also sensitive to growth in incomes of everyone below the poverty line. The intuition for this
is the following: the poverty gap reflects a social welfare function which is indifferent to the
distribution of income among poor people. In this case a given rate of average growth results
in a larger absolute increase in income for a person near the poverty line, and so the poverty
 -9-

measure is most sensitive to those nearest the poverty line, but is non-zero for all poor
people.

The squared poverty gap is also sensitive to growth in the incomes of all those below the
poverty line, but the sensitivity is now U-shaped. Growth in incomes of the richest and
poorest of those below the poverty line matters least, and the squared poverty gap is most
sensitive to growth in incomes of poor people somewhere in between these two extremes.
The intuition for this again depends on the underlying social welfare function, which now
values absolute transfers from richer to poorer poor people. This however is offset by the
fact that a given average growth rate results in a larger absolute increase in income for richer
poor people. This is why the sensitivity of the poverty measure to growth is a non-monotonic
function of the income percentile.

The Watts index has the property that it is equally sensitive to growth in all percentiles below
the poverty line. This is why Ravallion and Chen (2003) argue that a good measure of pro-
poor growth is the average (across all percentiles) growth rate of those below the poverty
line, i.e., the average growth rate of incomes of the poor. In this paper I go further and
decompose the average growth rate of incomes of the poor into growth in average incomes
and the average growth rate of the poor relative to growth in average incomes. This allows
me to distinguish between the effects of growth in average incomes and growth in relative
incomes on the Watts measure, and all the other measures considered here. This distinction is
not trivial, as we will see in the empirical section of the paper that there is more evidence for
the correlates of growth in average incomes than growth in relative incomes.

Finally, when inequality aversion is positive, i.e., <1, the EDEI measure is most sensitive to
growth in incomes of the poorest, but is non-zero for all income percentiles. The key
difference with the other poverty measures is that there is no longer a discontinuity at the
poverty linegrowth in all parts of the income distribution matters for poverty reduction,
with growth among the poorest mattering most.

To reiterate, the important point of Figure 2 is that poverty measures differ in their sensitivity
to growth in different percentiles of the income distribution. As a result, a given pattern of
relative income growth might be pro-poor (in the sense that the poverty measure falls) for
some poverty measures, but not for others. Moreover, if we take seriously the objective of
pro-poor growth with respect to a particular poverty measure, then this requires a growth
strategy focusing on particular parts of the income distribution. For example, pro-poor
growth with respect to the headcount requires an emphasis on those just below the
headcount, while pro-poor growth with respect to EDEI with strong inequality-aversion
requires interventions targeted to reaching the poorest of the poor.

Finally consider the average across all percentiles of the sensitivity t(p) of poverty to
growth in incomes of percentile p. Recall from equation (3) that this average sensitivity
measures the effect of growth in average incomes on the poverty measure. We have been
referring to high values of this average sensitivity of poverty to growth in average incomes as
one of the three potential sources of pro-poor growth. For the Foster-Greer-Thorbecke class
 - 10 -

of poverty measures, this average sensitivity can be expressed in terms of the poverty
1
measure itself when is not equal to zero, ( p) dp = (P ( ) P ( 1) ) , where Pt()
0
t t t

denotes the FGT measure with parameter .6 In the case where is zero, the sensitivity of the
1
Lt ' ( H )
headcount to growth in average incomes is: t ( p) dp = which can be
0
Lt ' ' ( H )
expressed as the slope of the density of income at the poverty line. For the Watts measure,
the average elasticity is simply minus one times the headcount. For EDEI, the sensitivity to
average growth is EDEI itself, implying that the elasticity of EDEI with respect to growth in
average incomes is one. While these results are useful for analytically characterizing the
sensitivity of the different poverty measures to growth in average incomes, we will see
shortly that cross-country differences in the sensitivity of poverty to growth in average
incomes are not empirically very important, in the sense that they explain little of the cross-
country variation in the first term in equation (3). We therefore do not discuss them further
here.

III. DATA

The objective of the rest of this paper is to use the analytic framework discussed above to
decompose observed changes in poverty into the three terms discussed above: (a) growth in
average incomes; (b) the sensitivity of poverty to growth in average incomes; and (c) changes
in relative incomes. After constructing these three terms for a large sample of developing
countries, I use them to identify the relative importance of, and factors correlated with, these
various sources of pro-poor growth.

I use household survey data on average incomes and ten points on the Lorenz curve for a
large number of surveys, as compiled by Martin Ravallion and Shaohua Chen at the World
Bank. Their data comes directly from primary sources, has been meticulously cleaned, and is
available at http://www.worldbank.org/research/povmonitor.7 Depending on the country, the
surveys measure either the distribution of income or the distribution of consumption.
Average income or consumption is measured in 1993 dollars and is adjusted for cross-
country differences in purchasing power parity. Since I am interested in changes in poverty
over time, I take only countries with at least two household surveys. This results in a total of
285 surveys covering 80 developing countries. Most of the survey dates are in the 1990s,
with some countries extending back to the 1980s. I use the World Banks dollar-a-day
poverty line which in 1993 dollars is $1.08 per day, or $393 per year.

6
This result can be found in Kakwani (1993).
7
I am grateful to Shaohua Chen for kindly providing key data from all of the household
surveys, including some that is not available on the poverty monitoring website.
 - 11 -

Using these surveys, I construct two datasets of spells of changes in poverty. In the first
dataset, I consider all possible spells for each country, discarding only those few cases where
the survey changes from an income to an expenditure survey or vice versa. This results in
205 spells of poverty changes. The length of these spells is quite short, averaging 3.5 years
and ranging from one to 13 years. In order to be able to look at changes over longer horizons,
I also construct a dataset consisting of one spell per country, where the initial and final years
are chosen so as to maximize the length of the spell given available data. This results in a set
of 80 spells, with an average length of 8.2 years, and ranging from two to 19 years. Finally I
eliminate all spells where the headcount measure of poverty is negligible in either the initial
or final period, i.e., below two percent, and I also drop a number of spells where the average
annual growth rate in the survey mean is implausibly large, i.e., more than 15 percent in
absolute value. This reduces the first dataset to 128 spells covering 58 countries with an
average length of 3.5 years, and the second dataset to 42 spells with an average length of
9.6 years.

In order to construct the different poverty measures and their decompositions discussed in the
previous section, I need the full Lorenz curve and not just the 10 points provided in the
Ravallion-Chen data. To obtain this, I assume that the Lorenz curve has the following
functional form:

L( p) = p (1 (1 p) ) , 0 , 0 < 1, 1

(4)

This particular parameterization is a member of a family of ordered Lorenz curves proposed

by Sarabia, Castillo, and Slottje (1999). I estimate the parameters of this Lorenz curve for
each survey using an algorithm suggested by the same authors. This involves selecting all
possible combinations of three points on the Lorenz curve, and then for each combination
finding values of , , and such that the Lorenz curve passes through these three points.
The final estimates of , , and are then found by averaging across all the resulting
estimates of these parameters, discarding those for which the parameter restrictions indicated
in Equation (4) that are required for the Lorenz curve to have positive first and second
derivatives do not hold. I then obtain the quantile function by analytically differentiating the
Lorenz curve and multiplying by average income. Using this, I can immediately construct
t(p) for each poverty measure of interest, as well as the growth incidence curve over the
y ( p)
observed discrete interval, g t ( p) = t 1.
y t 1 ( p )

IV. RESULTS

I begin by constructing the poverty measures of interest (the headcount, the poverty gap, the
squared poverty gap, the Watts index) for the initial and final years of each spell. I then
compute average annual changes in these measures, normalizing each by its initial value so
as to get proportionate changes that are more easily comparable across poverty measures.
Table 1 reports the simple correlations of the levels and average annual growth rates in these
 - 12 -

poverty measures with the corresponding log-levels and growth rates of survey mean
income. These simple correlations are all negative, and are large in absolute value, especially
those in levels and those for the long spells. Figure 3 graphs the proportional change in each
poverty measure against the growth rate of average incomes, using the sample of long spells.
In each case, there is a strong and highly significant negative relationship between changes in
poverty and change in average incomes. There is somewhat more dispersion around this
average relationship for the more bottom-sensitive poverty measures such as the poverty gap
and the squared poverty gap, than for the headcount measure. However, this may simply
reflect the greater sensitivity of bottom-sensitive poverty measures to measurement error in
individual incomes, as I argue in more detail below.

Table 1 and Figure 3 confirm the widely understood empirical regularity that poverty
measures tend to fall as average incomes increase. In the following sections this paper will
document the relative importance of the different sources of pro-poor growth discussed
above, and some evidence on the correlates of growth in average and relative incomes.

V. RELATIVE IMPORTANCE OF SOURCES OF PRO-POOR GROWTH

I now document the relative importance of the three sources of pro-poor growth that we have
been discussing. I do this in two steps. I first decompose the change in poverty in each spell
into a growth component and a distribution component using the decomposition
suggested by Datt and Ravallion (1992), which is the discrete-time analog of equation (3).
Let P( t , Lt ) denote a poverty measure based on mean income at time t, t, and the Lorenz
curve at time t, Lt. I then write the proportional change in the poverty measure over the
discrete interval between time t and t-1 as:

P( t , Lt ) P( t 1 , Lt 1 ) P( t , Lt 1 ) P( t 1 , Lt 1 ) P( t 1 , Lt ) P( t 1 , Lt 1 )
= + + t (5)
P( t 1 , Lt 1 ) P( t 1 , Lt 1 ) P( t 1 , Lt 1 )

The first term on the right-had side is the growth component of the change in poverty, and is
constructed as the proportional difference between the initial poverty measure and a
hypothetical poverty measure computed using the second period mean but the first period
Lorenz curve. The second term is the distribution component which is computed as the
proportional difference between the initial poverty measure and a hypothetical poverty
measure constructed using the first period mean but the second period Lorenz curve. These
two components are the discrete-time analogs of the two terms in equation (3). Unlike
equation (3), however, there is also a residual term because the decomposition is done over a
discrete and not an infinitesimal interval. I measure the proportional changes on the left- and
right-hand side of equation (5) as log differences and normalize by the length of the interval
to get average annual percent changes in poverty and its growth and distribution components
for each spell.
 - 13 -

Tables 2 and 3 report the results of applying this decomposition to the two datasets of spells.
Throughout these two tables, I use the following variance decomposition to summarize the
relative importance of the various components. If X and Y are two correlated random
variables, then I define the share of the variance of X+Y due to variation in X as
VAR( X ) + COV ( X , Y )
.8 The top panel of each table documents the importance
VAR( X ) + VAR(Y ) + 2 COV ( X , Y )
of the residual relative to the sum of the growth and distribution components of the change in
poverty. The first column shows the variance of the sum of the growth and distribution
components, the second column the variance of the residual, and the third the covariance
between the two. The final column reports the share of the variance of changes in poverty
due to the growth and distribution components, which is virtually one for all poverty
measures. This simply reflects the fact that the variance of the residual term is tiny relative to
the variance in measured changes in poverty. This can also be verified visually from the top
panel of Figure 4, which graphs the change in poverty on the horizontal axis, and the sum of
the growth and distribution components on the vertical axis, using the dataset of long spells.
The slope of the OLS regression line is the share of the variance in poverty changes due to
the growth and distribution components, and one minus the slope is the share due to the
residual term. It is clear from this graph that changes in poverty are largely accounted for by
the sum of the growth and distribution components, with very little of the variation due to the
residual.

The middle panel of Tables 2 and 3 does the same variance decomposition, but now to assess
the importance of the growth component relative to the distribution component of changes in
poverty. For the sample of all spells, between one-third and one-half of the variation in
changes in poverty is due to the growth component, with the remainder due to changes in
distribution. The story is quite different for the long spells, where the growth component of
changes in poverty dominates, accounting for between 65 and 90 percent of changes in
poverty. In both tables, the growth component is relatively less important for bottom-
sensitive poverty measures such as the poverty gap and the squared poverty gap. The middle
panel in Figure 4 graphically summarizes this second decomposition for the long spells
sample, plotting the growth component of changes in poverty on the vertical axis, and the
sum of the growth and distribution components on the horizontal axis. Again, the slope of the
OLS regression line can be interpreted as the share of the variation on the horizontal axis due
to the growth component. Visually inspecting this graph, it is clear that if poverty reduction
is large, it is mostly because the growth component of poverty reduction is large.

The bottom panel of Tables 2 and 3 further disentangles the growth component into growth
in average incomes, and the sensitivity of poverty to growth in average incomes, i.e., it

8
When X and Y are normally distributed, this variance decomposition has a very natural
interpretation. It tells us how much the conditional expectation of X increases for each unit
that we observe the sum (X+Y) to be above its mean value.
 - 14 -

separates the first term in equation (3) into its two components. Since the decomposition we
have been using applies to sums of random variables, I take the logarithm of the absolute
value of the growth component, which then becomes the sum of the logarithm of the absolute
value of growth, and the logarithm of the absolute value of the average sensitivity of poverty
to growth, and apply the decomposition to this sum. Tables 2 and 3 show that over 80 percent
of the cross-country variation in the growth component of changes in poverty is due to cross-
country differences in average income growth, and very little is due to cross-country
differences in the sensitivity of poverty to average income growth. The bottom panel of
Figure 4 illustrates this, but without the log transform required to do the variance
decomposition. On the horizontal axis I graph the growth component of the change in
poverty, while on the vertical axis I graph growth in average incomes. While the slope of this
regression cannot be interpreted as a variance share, it nevertheless is very clear that cross-
country differences in the growth component of poverty are overwhelmingly accounted for
by cross-country differences in growth. Put differently, it is clear from this graph that if the
growth component of poverty reduction is large, it is most likely that growth itself was large,
rather than that the sensitivity of poverty to growth was large.9

Two striking features of Tables 2 and 3 merit further discussion: (a) the share of the variance
due to growth is smaller over the short horizons represented in the dataset of all spells, and is
larger in the dataset of long spells; and (b) in both datasets, the share of the variation in
poverty measures due to growth declines as the poverty measures become more bottom-
sensitive, for example when we move from the headcount to the poverty gap to the squared
poverty gap. We can understand these properties better with the help of a simple example
using the EDEI poverty measure. We can write the discrete proportional change in EDEI as:

ln EDEI t ( ) = ln EDEI t (1) + ( ln EDEI t ( ) ln EDEI t (1) ) (6)

Recall that EDEI(1) is just average income, and that the sensitivity of EDEI to growth in
average incomes is one. As a result, Equation (6) is a way of writing the DattRavallion
decomposition for this measure, with the first term corresponding to the growth component

9
At first glance this result seems inconsistent with Ravallion (1997), who documents that the
sensitivity of poverty to growth varies significantly with initial inequality. However, using
either sample of spells I can replicate the result that the interaction of growth with the initial
Gini coefficient is significantly correlated with the change in headcount measures of poverty.
Intuitively, the difference between the results here and those in Ravallion (1997) can be
understood as follows: although the interaction of growth with initial inequality is significant
in explaining changes in poverty, it does not add much to the explanatory power of the
regression in my samples. Put differently, although there are cross-country differences in the
sensitivity of poverty to growth which are significantly correlated with initial inequality, in
the data these differences are dominated by the much larger cross-country differences in
growth itself.
 - 15 -

and the second to the distribution component. Moreover, the distributional change
component of the change in this poverty measure corresponds to the change in a particular
inequality measure: it is simply the proportional change in one minus the Atkinson inequality
measure.10

For the purpose of this example, assume that the logarithm of household incomes is
distributed normally with mean t and standard deviation t. As the number of households in
each country becomes large, it is straightforward to see that ln EDEI() converges in

probability to + 2 .11 Using this result, we can write the DattRavallion decomposition
2
for EDEI as:

1
ln EDEI t ( )
p
t + t
2
(7)
2

Equation (7) is helpful for understanding the two key features of Tables 2 and 3 mentioned
above. Suppose that t and 2t are independent across countries. Then the share of

2


variance of changes in poverty due to growth with be V [ t ] / V [ t ] +

1
[ ]
V t2 .

2
The further is from one, i.e., the more EDEI weights incomes of the poor (for <1) or the
rich (for >1), the smaller is the share of the variance of change in poverty due to growth and
the larger is the share due to the distribution component. In other words, the more bottom-
sensitive (or for that matter, top-sensitive), the poverty measure, the larger will be the
contribution of changes in relative incomes to changes in the poverty measure. This suggests
an explanation why the share of the variance of changes in poverty due to growth declines as
the poverty measures become more bottom-sensitive.

Equation (7) is also helpful for thinking about why the share of the variance of changes in all
poverty measures due to growth is smaller in the short run than in the long run. One possible
explanation is that measurement error in changes in inequality is relatively more important
than measurement error in changes in average incomes when the period under consideration
is short. It is not clear how one might directly document that this is the case. However, it is

10
The Atkinson class of inequality measures is 1-EDEI()/EDEI(1).
11
This is because EDEI()1/ is the sample average of incomes raised to the power . As the
number of households becomes large, this converges to the expectation of income raised to
the power . If incomes are lognormally distributed, we can use the moment generating
function of the lognormal distribution to evaluate this expectation to obtain the result in the
text.
 - 16 -

worth noting that this pattern of relative importance of measurement error seems quite
plausible. Suppose for example that in every period, log household income is measured with
an additive zero-mean measurement error, which is independent of true incomes and is i.i.d.
normal across households. If the number of households is large, this zero-mean measurement
error will not be reflected in average income. However, the variance of measured log
incomes will now be t2 + t2 , where t2 is the variance of measurement error. Suppose
further that the variance of measurement error fluctuates randomly over time. As long as the
variance of measurement error does not trend up or down too fast, the average annual change
1 t2 t2 k t2 t2 k
in the distribution component of changes in poverty, + will be
2 k k

smaller the longer is the time interval, k. While this is not conclusive, it does suggest that part
of the reason for the relatively smaller importance of the growth component of changes in
poverty over shorter horizons might simply be measurement error in household incomes.

In summary, the results in this subsection tell us that, over longer horizons, between 65 and
90 percent of cross-country differences in poverty changes can be accounted for by growth in
average incomes. Over shorter horizons the share of the variance of changes in poverty due
to changes in growth is somewhat smaller, and changes in income distribution are relatively
more important. However, this may in part be an artifact of measurement error in individual
incomes. While there are of course cross-country differences in the sensitivity of poverty
changes to average income growth, reflecting cross-country differences in the initial
distribution of income, empirically these are relatively unimportant in understanding changes
in poverty. Finally, although these calculations are done based on a discrete-time
decomposition with unavoidable residuals, empirically these residuals are also small and do
not detract from the main conclusions.

VI. WHAT DRIVES THE SOURCES OF PRO-POOR GROWTH?

I now turn to the question of what drives the various sources of pro-poor growth. In light of
the results of the previous section that cross-country differences in the sensitivity of poverty
to growth in average incomes are relatively unimportant, I focus primarily on the first and
third sources of pro-poor growth: growth in average incomes, and changes in relative
incomes. I measure growth in average incomes as the average annual growth rate over the
spell of household average income or consumption. I use five different measures of changes
in relative incomes. The first is simply the average annual change in the Gini index, for
comparability with existing results on the determinants of changes in inequality. The next
four measures are the discrete-time distribution components of the change in each of the four
poverty measures I have been considering. Recall that, for infinitesimal changes, the
distribution component of the change in the headcount measures the growth rate of incomes
of those at the poverty line relative to average growth. For the poverty gap and the squared
poverty gap, the distribution component measures a weighted average of relative growth
rates of those below the poverty line, with the poverty gap giving most weight to those at the
poverty line. For the Watts index, the distribution component measures the average growth
rate of those below the poverty line relative to overall growth.
 - 17 -

There are many limitations to this dataset which make it very difficult to use it to identify
causal determinants of growth or change in relative incomes. The sample of countries is quite
small, especially when we consider the long spells dataset where the determinants of longer-
term growth and distributional change are more likely to be apparent. There is also
substantial measurement error in the data on growth in survey means, and for measures of
distributional change. While classical measurement error in these dependent variables will
not necessarily lead to biases in coefficient estimates, it will inflate standard errors and
reduce the significance of estimated coefficients. Because we have relatively few spells per
country in the dataset consisting of all spells, and only one per country in the long spells
dataset, we cannot meaningfully base identification on the within-country variation in the
data. This raises the possibility that any partial correlations we uncover may be driven by
unobserved country-specific characteristics excluded from the regressions. The small number
of spells per country also means that we will not be able to rely on internal instruments to
achieve identification.12

In light of these difficulties, my more modest objective here is to simply document the partial
correlations between these sources of pro-poor growth and a number of right-hand-side
variables of interest, and to interpret them with an appropriate abundance of caution. I
consider the same list of right-hand-side variables as in Dollar and Kraay (2002). In that
paper, we considered a small number of variables that are frequently found to be robustly
correlated with real GDP growth in the cross-country growth literature: institutional quality
as proxied by a measure of property rights protection (the rule of law indicator from
Kaufmann, Kraay, and Mastruzzi (2003)), as well as the World Banks Country Policy and
Institutional Assessment (CPIA) indicator; openness to international trade (the constant-price
local currency ratio of exports plus imports to GDP); inflation as a proxy for stable monetary
policy (measured as the logarithm of one plus the CPI inflation rate); the size of government
(measured as the share of government consumption in GDP in local currency units); and a
measure of financial development (the ratio of M2 to GDP in local currency units).

We also considered a number of variables that are generally less robustly correlated with
growth, but that some studies have found to be correlated with inequality, either in levels or
in differences. These include a measure of democracy (the voice and accountability
indicator from Kaufmann, Kraay, and Mastruzzi (2003)); relative productivity in agriculture
(measured as the ratio of value added per worker in agriculture relative to overall value
added per worker, both in current local currency units); and primary educational attainment.

12
This is of course especially problematic for the regressions below that involve a lagged
dependent variable, which, together with unobserved country-specific effects, will make
estimates of the coefficient on the lagged dependent variable inconsistent, and can bias the
coefficients on the other variables in different directions depending on their correlation with
the lagged dependent variable.
 - 18 -

This list of variables is clearly not an exhaustive list of the potential determinants of growth
in average incomes or changes in relative incomes. However, it does provide us with a useful
place to begin looking for the correlates of growth and distributional change that matter for
poverty reduction. I begin by estimating a number of very parsimonious regressions for each
of the dependent variables of interest. I regress growth in average incomes on the log-level of
initial period income (to pick up convergence effects) plus each of the control variables
described above, one at a time. I do the same for the change in the Gini coefficient, instead
including the initial level of the Gini coefficient to pick up convergence in this variable. For
the remaining four distribution components of changes in poverty, I simply estimate
univariate regressions of each one on each of the right-hand-side variables. 13

Table 4 shows the results using the sample of all spells, and Table 5 shows the same
information but using only the smaller sample of long spells. Each entry in these two tables
corresponds to a different regression. The rows correspond to each of the indicated right-
hand-side variables. The columns correspond to the different dependent variables. The first
two columns report regressions for growth and for the change in the Gini. Both these
regressions also include either initial log income or the initial Gini. I do not report the
coefficients on these variables to save space, but they generally enter negatively and usually
significantly in all specifications, consistent with available evidence on convergence in both
of these variables. The remaining columns report results for the distribution component of the
change in each of the four poverty measures. Recall that these measures are oriented such
that a reduction corresponds to a reduction in poverty.

A first glance at Tables 4 and 5 shows that very few of the explanatory variables of interest
are significantly correlated with the dependent variable of interest at conventional
significance levels. In fact, in the 108 regressions in these two tables, there is only one
coefficient that is significant at the 5 percent level, and only three that are significant at the
10 percent level. One possible explanation for the lack of significant results is that the
measures of growth and distributional change on the right-hand-side are contaminated by
substantial measurement error. It is difficult to judge however by how much standard errors
should be adjusted to reflect this measurement error.14 Rather than try to assess the statistical
significance of the partial correlations documented in Tables 4 and 5, I simply describe some
of the qualitative patterns that emerge.

13
Ravallion (2001) documents the empirical importance of inequality convergence using the
Gini coefficient. I have experimented with alternative initial inequality measures in the
regressions involving the distributional change components of the various poverty measures,
but I find that none are robustly significant.
14
In Table 4, there is an additional factor which likely biases standard errors upward. For
countries with multiple spells of growth or distributional change, there is likely to be by
construction a negative correlation between the errors of successive spells. Correcting for this
will likely reduce standard errors somewhat.
 - 19 -

Consider first institutional quality, as proxied by the rule of law indicator. This tends to be
positively correlated with growth, but also positively correlated with each of the measures of
distributional change, suggesting that distributional change tends to raise poverty in countries
with good institutional quality. However, the strength of the correlation with growth is much
larger than the correlations with distributional change: the t-statistic from the growth
regression is about twice the average t-statistic for the different measures of distributional
change. The voice and accountability measure follows the same pattern, likely because it is
quite highly correlated with rule of law in this sample.

In the case of openness to international trade, the correlation with growth is generally
stronger than the correlations with distributional change. Moreover, the sign of the
correlation with each of the measures of distributional change is negative, indicating that
distributional change tends to be poverty-reducing in countries that trade more. Inflation
tends to be extremely weakly correlated with growth in this sample, and tends to be
positively correlated with distributional change, but again the correlation is very weak.
Government consumption is negatively correlated with growth, but interestingly is also
negatively correlated with each of the measures of distributional change, suggesting that
distributional change tends to be pro-poor in countries with larger governments. Financial
development also appears to be very weakly correlated with either growth or distributional
change in these regressions.

Relative productivity in agriculture is essentially uncorrelated with growth, but tends to be

positively correlated with distributional change measures. Somewhat surprisingly the sign of
the correlation suggests that countries with higher relative productivity in agriculture are
more likely to experience poverty-increasing changes in relative incomes. Finally, primary
education is also virtually uncorrelated with growth, and also is essentially uncorrelated with
most of the distributional change measures, with the exception of the Gini in the long spells
regression.

Overall, while most of the partial correlations documented in Tables 4 and 5 are not
statistically significant, the qualitative pattern suggests that there may be some tradeoffs.
Rule of law is positively correlated with growth but also with poverty-increasing shifts in
relative incomes. The opposite is true for government consumption. In contrast trade is
positively correlated with growth and with poverty-reducing shifts in relative incomes. In
Table 6 we examine these possible tradeoffs in a slightly richer empirical specification, using
the dataset of long spells. We begin by estimating a more fully-specified growth regression
with initial income, and initial values of institutional quality, trade openness, and size of
government as right-hand-side variables. Despite the likely noisiness of the data, it is
possible to find plausible specifications in which some of the determinants of growth from
the growth literature are also significantly correlated with growth in the household survey
mean. The first column of Table 6 illustrates one such regression, which includes initial
income, institutional quality, trade openness, and government consumption on the right-
hand-side. Each of these variables enters with signs consistent with the broader growth
literature. Initial income enters negatively, picking up convergence effects. Institutional
 - 20 -

quality and trade are both positively correlated with growth, and larger government size is
associated with slower growth. I do not want to claim that these results are a robust feature of
this particular dataset. However, the results are broadly consistent with the findings of the
empirical growth literature, which uses per capita GDP growth rates for a much larger
sample of countries, and so it seems reasonable to focus on this particular specification.

In the second column of Table 6, I show the same regression, but instead using the change in
the Gini coefficient as the dependent variable. None of the correlates of growth are
significantly correlated with changes in this summary statistic of inequality. It is however
difficult to move from the results in these first two columns to conclusions about the effects
on poverty, without making restrictive assumptions on the shape of income distributions.
Since I have already constructed the growth and distribution components of changes in
poverty, I can simply use these as dependent variables to investigate how these correlates of
growth matter for changes in poverty. The remaining four columns of Table 6 do this for the
headcount and for the Watts index. Given the high correlation between the growth
components of poverty changes and average income growth documented above, it is not
surprising that the regressions for the growth components of poverty are very similar to the
growth regression in the first column. Institutional quality, trade, and government size are
significantly correlated with the growth components of changes in these two poverty
measures, although the significance is slightly less than before. In contrast, I find very little
evidence that any of these three variables are significantly correlated with the distribution
component of changes in poverty. The only exception is institutional quality, which is
significant at the 10 percent level in the headcount distribution component regression. The
sign indicates that poverty-increasing distributional change is more likely to occur in
countries with better institutional quality.

Despite the general insignificance of the distributional change regressions, it is interesting to

quantify the relative magnitudes of the estimated coefficients as well. Since the observed
change in poverty is essentially equal to the sum of the growth and distribution components
(with a relatively unimportant residual as we have seen), the overall effect on poverty of each
of these variables is just the sum of the two coefficients. Figure 5 graphically illustrates the
growth and distribution effects of these variables on poverty as measured by the headcount.
For rule of law, the growth effect lowers poverty, while the distribution effect raises it. The
overall net effect is negative, however, since the growth effect is larger in absolute value than
the distribution effect. For trade, both the growth and distribution effects reduce poverty,
with a much larger growth effect. Finally, the growth and distribution effects work in
opposite directions for government size, again with the adverse growth effect dominating the
smaller poverty-reducing distribution effect.
 - 21 -

VII. CONCLUSIONS

What do we learn from all of this? I have used standard decomposition techniques to identify
three potential sources of pro-poor growth: (a) a high rate of growth of average incomes,
(b) a high sensitivity of poverty to growth in average incomes, and (c) a poverty-reducing
pattern of growth in relative incomes. Empirically implementing these decompositions for a
large sample of changes in poverty, we have seen that only the first and third sources of pro-
poor growth are empirically relevant. Moreover, in the medium-to-long run, cross-country
differences in growth in average incomes are the dominant variable explaining changes in
poverty. Together, these decomposition results indicate that the search for pro-poor growth
should begin by focusing on determinants of growth in average incomes. At some level, this
is an encouraging conclusion, because we have by now a large body of empirical results on
the policies and institutions that drive growth in average incomes.

Nevertheless, the empirical results shown here on the correlates of growth and distributional
change are rather unsatisfactory. Most of the simple correlations between these dependent
variables and a number of right-hand-side variables of interest are quite far from significant
at conventional levels, although the balance of the evidence seems to suggest that the
correlations with growth are, on average, somewhat more significant than the correlations
with distributional change. It is possible to find multivariate specifications for growth in
survey means over longer horizons that yield sensible results consistent with the empirical
growth literature. At most, this provides some comfort that the results on partial correlates of
growth in survey mean income documented here are more broadly robust and may even have
causal interpretations. However, there is much more to be learned about why per capita GDP
growth, whose determinants are well documented, translates so imperfectly into growth in
survey means.15

In contrast, in this sample, it is difficult to find significant correlates of either changes in

summary statistics of inequality, such as the Gini, or distributional shifts that matter for a
variety of poverty measures of interest, such as the ones I have constructed here. Moreover,
some of the partial correlations with distributional change documented here do not appear to
be consistent with those uncovered in other papers. For example, a number of papers have
found that increased openness increases summary measures of inequality, at least in low-
income countries (Barro (2000), Lundberg and Squire (2003), Milanovic (2003)). In contrast
Dollar and Kraay (2002) find no correlation at all between several measures of openness and
income distribution, with and without several interactions. The results here, although not
very significant, consistently show that more open countries are more likely to see poverty-
reducing shifts in income distribution. This wide range of signs and significance of results
from the cross-country literature should caution us against drawing particularly strong
conclusions about the determinants of pro-poor changes in relative incomes from any one
cross-country study.

15
See, for example, Deaton (2003) for a discussion of some of the relevant issues.
 - 22 -

Table 1. Correlations of Poverty Measures and Survey

Mean Income or Consumption

Levels Growth Rates

All spells (128 observations)

Head count -0.842 -0.590
Poverty Gap -0.727 -0.519
Squared poverty gap -0.615 -0.472
Watts -0.647 -0.489

Long spells (42 observations)

Headcount -0.935 -0.717
Poverty gap -0.722 -0.672
Squared poverty gap -0.630 -0.635
Watts -0.651 -0.640

Source: Author's calculations.

 - 23 -

Table 2. Decomposing Changes in Poverty: All Spells

Growth, Distribution, and Residual Components of Change in Poverty: dP = G + D + R

Growth and Distribution Components vs Residual (G+D vs R)

V(G+D) V(R) COV(G+D,R) Share of Variance Due to G+D

Head count 0.0284 0.0008 -0.0004 0.9859

Poverty gap 0.0485 0.0010 -0.0004 0.9877
Squared poverty gap 0.0702 0.0013 -0.0007 0.9914
Watts 0.0599 0.0010 -0.0005 0.9917

Growth vs Distribution Components (G vs D)

V(G) V(D) COV(G,D) Share of Variance Due to G

Head count 0.0168 0.0173 -0.0029 0.4912

Poverty gap 0.0216 0.0334 -0.0033 0.3781
Squared poverty gap 0.0255 0.0517 -0.0035 0.3134
Watts 0.0231 0.0435 -0.0033 0.3300

Average Growth and Sensitivity to Average Growth in Growth Component: ln|G| = ln|dln| + ln||

V(|dln|) V(||) COV(|dln|,||) Share of Variance Due to |dln|

Head count 1.1290 0.1577 0.1436 0.8086
Poverty gap 1.1089 0.1311 0.1202 0.8302
Squared poverty gap 1.1073 0.1369 0.1224 0.8259
Watts 1.1021 0.1243 0.1135 0.8364

Source: Author's calculations.

 - 24 -

Table 3. Decomposing Changes in Poverty: Long Spells

Growth, Distribution, and Residual Components of Change in Poverty: dP = G + D + R

Growth and Distribution Components vs Residual (G+D vs R)

V(G+D) V(R) COV(G+D,R) Share of Variance Due to G+D

Head count 0.0064 0.0005 -0.0004 0.9836

Poverty gap 0.0120 0.0008 -0.0010 1.0185
Squared poverty gap 0.0181 0.0011 -0.0017 1.0380
Watts 0.0148 0.0009 -0.0011 1.0148

Growth vs Distribution Components (G vs D)

V(G) V(D) COV(G,D) Share of Variance Due to G

Head count 0.0077 0.0024 -0.0018 0.9077

Poverty gap 0.0106 0.0046 -0.0016 0.7500
Squared poverty gap 0.0129 0.0073 -0.0010 0.6538
Watts 0.0116 0.0063 -0.0015 0.6779

Average Growth and Sensitivity to Average Growth in Growth Component: ln|G| = ln|dln| + ln||

V(|dln|) V(||) COV(|dln|,||) Share of Variance Due to |dln|

Headcount 1.3228 0.1642 0.1402 0.8278
Poverty gap 1.2836 0.1492 0.1131 0.8419
Squared poverty gap 1.2765 0.1527 0.1114 0.8401
Watts 1.2702 0.1414 0.1025 0.8491

Source: Author's calculations.

 - 25 -

Table 4. Correlates of Pro-Poor Growth: All Spells

Dependent Variable Is: Distribution Component of Change in:

No. of
Growth Change in Gini P0 P1 P2 Watts Observations

Right-hand side variable is:

CPIA 0.006 -0.001 -0.007 -0.007 -0.008 -0.009 121

0.920 0.160 0.477 0.354 0.310 0.360

KK rule of law 0.012 0.002 0.016 0.019 0.023 0.019 128

1.339 0.292 0.766 0.674 0.633 0.568

Trade/GDP 0.017 -0.017 -0.034 -0.038 -0.041 -0.041 126

1.120 1.431 0.990 0.805 0.692 0.757

ln(1+Inflation) 0.001 0.006 0.039 0.039 0.039 0.037 116

0.059 0.323 0.790 0.566 0.449 0.474

Government -0.154 -0.053 -0.421 -0.488 -0.507 -0.532 125

Consumption/GDP 1.206 0.515 1.539 1.250 1.041 1.192

M2/GDP 0.015 -0.008 -0.024 -0.013 -0.002 -0.010 124

0.638 0.431 0.475 0.182 0.028 0.130

KK voice and 0.002 0.006 0.003 0.004 0.004 0.002 128

accountability 0.294 0.891 0.194 0.150 0.153 0.086

Relative productivity -0.005 0.017 0.053 0.060 0.065 0.061 126

in agriculture 0.271 1.200 1.324 1.106 0.969 0.994

Average years of 0.003 0.002 -0.006 -0.007 -0.008 -0.010 101

primary education 0.538 0.649 0.534 0.477 0.410 0.576

Source: Author's calculations.

Note: Heteroskedasticity-consistent t -statistics reported below coefficient estimates. CPIA is country policy
and institutional asset; KK is Kaufmann and Kraay.
 - 26 -

Table 5. Correlates of Pro-Poor Growth: Long Spells

Dependent Variable Is: Distribution Component of Change in:

Number of
Growth Change in Gini P0 P1 P2 Watts Observations

Right-hand side variable is:

CPIA 0.005 0.001 0.001 0.004 0.006 0.005 40

0.555 0.267 0.143 0.282 0.236 0.315

KK rule of law 0.024 0.007 0.022 0.022 0.021 0.020 42

1.726 0.950 1.583 1.100 0.861 0.864

Trade/GDP 0.035 -0.006 -0.008 -0.014 -0.019 -0.015 42

1.656 0.497 0.364 0.441 0.482 0.423

ln(1+Inflation) -0.002 0.003 -0.005 -0.023 -0.038 -0.031 39

0.073 0.258 0.196 0.681 0.896 0.778

Government -0.110 -0.033 -0.225 -0.278 -0.327 -0.327 42

Consumption/GDP 0.742 0.421 1.526 1.350 1.256 1.357

M2/GDP -0.028 -0.016 -0.053 -0.048 -0.045 -0.045 42

0.663 0.722 1.205 0.783 0.572 0.618

KK voice and 0.021 0.008 0.013 0.011 0.101 0.009 42

accountability 1.659 1.231 1.049 0.646 0.462 0.438

Relative productivity 0.013 0.021 0.044 0.050 0.054 0.056 42

in agriculture 0.543 1.388 1.513 1.277 1.105 1.217

Average years of -0.001 0.008 0.004 0.006 0.008 0.006 32

primary education 0.063 2.601 0.638 0.521 0.558 0.475

Source: Author's calculations.

Note: Heteroskedasticity-consistent t -statistics reported below coefficient estimates. CPIA is country
policy and institutional asset; KK is Kaufmann and Kraay.
 Table 6. Multivariate Growth and Distributional Change Regressions

Annual Percent Change in Headcount Annual Percent Change in Watts Index

Annual Percent Change in: Growth Distribution Growth Distribution
Survey mean Gini component component component component

Initial income -0.017 -0.008 0.037 -0.018 0.040 -0.023

1.978 1.470 1.769 1.409 1.577 1.284

KK rule of law 0.022 0.009 -0.046 0.029 -0.049 0.029

2.050 0.919 2.188 1.785 2.108 1.221

Trade/GDP 0.045 -0.011 -0.060 -0.007 -0.077 -0.011

1.978 0.911 1.659 0.361 1.667 0.310

Government -0.280 -0.048 0.600 -0.244 0.667 -0.330

- 27 -

consumption 2.229 0.425 2.114 1.010 2.124 1.175

R -squared 0.239 0.095 0.263 0.182 0.222 0.103

No. of observations 42 42 42 42 42 42

Source: Author's calculation.

Note: Heteroskedasticity-consistent t -statistics reported below coefficient estimates. CPIA is country policy and institutional asset;
KK is Kaufmann and Kraay.
 F i g u r e 1 : R e l a t iv e G r o w t h I n c id e n c e C u r v e s

0 .0 8

0 .0 6

0 .0 4 In d o n e s ia 1 9 9 6 - 1 9 9 9

0 .0 2

0
0 0 .2 0 .4 0 .6 0 .8
- 0 .0 2
- 28 -

C h in a 1 9 9 0 - 1 9 9 8
- 0 .0 4

R e la t i v e t o A v e r a g
- 0 .0 6

G ro w th R a te o f P e r c e
- 0 .0 8

-0 . 1

- 0 .1 2 P e r c e n t ile o f In c o m e D is t r ib u t io n , p
 F ig u r e 2 : S e n s it iv i t y o f P o v e r t y t o G r o w t h in P e r c e n t il e p

P e r c e n t ile o f In c o m e D is t r ib u t io n , p
0
0 0 .2 0 .4 P ( 2 ) 0 .6 0 .8
- 0 .2
E D E I( - 1 )
- 0 .4

- 0 .6
P (1 )
- 0 .8
- 29 -

-1
W a tts
- 1 .2

- 1 .4

to Growth in Percentile p
P (0 )

Sensitivity of Poverty Measure

- 1 .6

- 1 .8

-2
 Figure 3: Growth and Poverty Reduction: Long Spells

ETH9500
Headcount Poverty Gap
0.2 PER8596 0.2
ETH9500 PER8596
0.15 0.15

0.1 YEM9298 0.1 PRY9098

YEM9298 BDI9298
CIV8595
CIV8595 COL8898
0.05 COL8898 0.05 BOL9099
PRY9098
BDI9298BOL9099 GHA8799
RUS9398 BGD8400 LSO8695
VEN8198 BGD8400
ZMB9198
GHA8799 NGA8597
VEN8198ZMB9198
NGA8597
0 MDG8099 LSO8695 0RUS9398
MDG8099
IND8397 BWA8593 IND8397 BWA8593
-0.15 -0.1 -0.05 LKA8595
0 EGY9199 0.05 0.1 0.15 -0.15 -0.1 -0.05 0 LKA85950.05
TUN8590 0.1 0.15
SLV8998
CRI8696
MYS8497
MRT8895
ECU8895
TUN8590 MYS8497 CRI8696
-0.05 -0.05 EGY9199SLV8998
CHN9098 CHN9098
HND8998
HND8998 ECU8895
THA8800
y = -1.16x - 0.01 THA8800
JAM8800MEX8998
UGA8996 MEX8998
KEN9297 GTM8700 JAM8800
BRA8598
IDN8700 -0.1 MRT8895 GTM8700
R2 = 0.51 -0.1 y = -1.44x - 0.01 BRA8598PHL8500
PAN9197 PHL8500
IDN8700

Average Annual Growth in Poverty

PAK8798 GMB9298

Average Annual Growth in Poverty

R2 = 0.45 UGA8996
PAN9197 GMB9298
AZE9501
-0.15 -0.15KEN9297
PAK8798
AZE9501

-0.2 -0.2
- 30 -

Average Annual Growth in Survey Mean Average Annual Growth in Survey Mean
VNM9398 VNM9398

ETH9500 ETH9500
Squared Poverty Gap
PER8596
Watts
0.2 PER8596 0.2

0.15 0.15
PRY9098 PRY9098
BDI9298
BDI9298
YEM9298 0.1 YEM9298 0.1

BOL9099
COL8898 COL8898
BOL9099
CIV85950.05
CIV85950.05 GHA8799 GHA8799 LSO8695
LSO8695
NGA8597 NGA8597
VEN8198 BGD8400
VEN8198 BGD8400
ZMB9198
0 MDG8099 ZMB9198
0 MDG8099 BWA8593
BWA8593 RUS9398
IND8397
IND8397
RUS9398 -0.15 -0.1 -0.05 0 0.05 0.1 0.15
-0.15 -0.1 -0.05 0 TUN8590
0.05 0.1 0.15 TUN8590
LKA8595
LKA8595
-0.05 HND8998
MYS8497 CRI8696
-0.05 HND8998
MYS8497 CRI8696 EGY9199 CHN9098
CHN9098 SLV8998
SLV8998 THA8800
EGY9199 THA8800 MEX8998
ECU8895
MEX8998
ECU8895 -0.1 JAM8800 GTM8700
PHL8500
-0.1 JAM8800 PHL8500
GTM8700
y = -1.52x - 0.01 BRA8598
IDN8700
Average Annual Growth in Poverty

BRA8598 MRT8895

Average Annual Growth in Poverty

y = -1.63x - 0.01 GMB9298
IDN8700
MRT8895 GMB9298 R2 = 0.41 -0.15
-0.15 UGA8996
PAN9197
R2 = 0.40 PAN9197 KEN9297
UGA8996 PAK8798
KEN9297 AZE9501
PAK8798 -0.2
-0.2
AZE9501 Average Annual Growth in Survey Mean
Average Annual Growth in Survey Mean VNM9398
VNM9398
 - 31 -

Figure 4: Decomposing Changes in the Headcount

Growth and Distribution Components vs Residual

0.25
Distribution Components ETH9500
0.2 PER8596
y = 0.97x - 0.00
Sum of Growth and

0.15
R2 = 0.92 0.1
YEM9298
0.05 COL8898
BDI9298 CIV8595
ZMB9198
BGD8400
BOL9099
RUS9398
VEN8198
GHA8799
0 IND8397
NGA8597
MDG8099
SLV8998
EGY9199
LKA8595
CRI8696
MRT8895BWA8593
LSO8695
ECU8895
MYS8497
-0.2 -0.15 -0.1 -0.05TUN8590
UGA8996-0.05 0 0.05
PRY90980.1 0.15 0.2
JAM8800
IDN8700
BRA8598 CHN9098
MEX8998
HND8998
THA8800
GTM8700
PAN9197 -0.1
AZE9501
PAK8798KEN9297
PHL8500
GMB9298 -0.15
VNM9398 -0.2
Average Annual Growth in Headcount

Growth Component vs Distribution Component

YEM9298

y = 0.92x + 0.00 0.2

ETH9500
PER8596
R2 = 0.70 0.15
Growth Component

0.1 CIV8595

0.05 VEN8198
KEN9297 RUS9398
MDG8099 BDI9298
COL8898
PAN9197 0 ZMB9198
BGD8400
NGA8597
EGY9199
IND8397
JAM8800 MYS8497
UGA8996 GHA8799
SLV8998
MRT8895
ECU8895
TUN8590 BOL9099
-0.2 -0.15 -0.1 BRA8598
-0.05 LKA8595
-0.05 0 0.05 0.1 0.15 0.2
HND8998
AZE9501MEX8998
IDN8700 CRI8696
LSO8695
BWA8593
THA8800
CHN9098 -0.1
GTM8700
PAK8798
-0.15
GMB9298
PHL8500 PRY9098
VNM9398 -0.2
Sum of Growth and Distribution Components

Growth in Mean vs Sensitivity of Poverty to Growth

GMB9298

0.1
PRY9098 GTM8700
Growth in Survey Mean

VNM9398
PHL8500 HND8998
LSO8695
CHN9098
BWA8593 0.05
PAK8798 CRI8696
MEX8998
AZE9501 BRA8598
THA8800 SLV8998
MRT8895
IDN8700 ECU8895
UGA8996
MYS8497
TUN8590
JAM8800
BOL9099
LKA8595 PAN9197
GHA8799
IND8397
NGA8597
0 EGY9199
BGD8400
ZMB9198
MDG8099
COL8898
BDI9298
RUS9398
-0.15 -0.1 -0.05 0 KEN9297
0.05 0.1 0.15
VEN8198
-0.05 CIV8595
PER8596
y = -0.52x + 0.00 -0.1 YEM9298
R2 = 0.88 Growth Component
ETH9500
 - 32 -

Figure 5: Policies and the Growth and Distribution Components

of Changes in Policy

6%
Average Annual Percent Change in Headcount

4%

2%

0%
Net

Net

Net
Distribution
Distribution

Distribution
Growth
Growth

Growth
-2%

-4%
Rule of Gov/GDP
Trade/GDP
Law
-6%
 - 33 -

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